Busting Steve Cohen: How a Minor Charge Threatens a Major Figure

Hedge-fund manager Steven A. Cohen, founder and chairman of SAC Capital Advisors, listens to a question during a one-on-one interview session at the SkyBridge Alternatives Conference in Las Vegas on May 11, 2011.

After years of investigations, wiretaps, and coercing cooperation from numerous witnesses, the government’s big insider trading case against hedge fund impresario and long-time target Steve Cohen may come down to a single “failure to supervise” charge.

That’s right: No insider trading charges; no criminal charges; and no fraud allegations. It sounds like pretty weak stuff considering what the Feds believe to be the scope of the crime: numerous instances of insider trading at the massive hedge fund that Cohen runs, the Stamford, Connecticut-based SAC Capital — and possibly the direct involvement of Cohen himself in some of those trades.

But the case filed by the Securities and Exchange Commission on Friday shouldn’t be taken lightly—and it certainly won’t be by Cohen and his legal team, who know that the Feds aim to put Cohen out of business once and for all.

The fact is that even without charging Cohen with insider trading or fraud, the SEC is empowered to seek penalties as if the hedge fund titan had committed those acts. It’s the same deal facing former MF Global chief Jon Corzine: The feds apparently don’t have the evidence that Corzine had ordered the misuse of around $1 billion in customer funds some of which remains missing, as the firm tanked back in late 2011. But what happened on his watch can’t be condoned, regulators believe. So they’re seeking to ban Corzine from the securities business for life.

Remember: A tax evasion charge, not murder, is what ultimately ended the criminal career of Al Capone.

For his part, Cohen continues to insist that he’s done nothing wrong (as does Corzine). It should be pointed out that the SEC can file only civil charges — so unlike Capone, neither Corzine nor Cohen are facing jail time. But putting Steve Cohen out of business would be a huge story, and a huge coup for the SEC. Keep in mind, Cohen isn’t just any investor. He just might be the most successful one over the past two decades, during which time his performance has surpassed market luminaries like Warren Buffett and many others.

In fact, as I point out in my new book, Circle of Friends, what has people inside the SEC and the Justice Department so concerned about Cohen is precisely that his returns have been so strong year after year after year. It’s a record of such consistent outperformance that regulators consider it essentially impossible — unless of course, you’re cheating the system.

Cohen started SAC in 1992 and remained comfortably under the radar, cranking out huge returns and attracting billions of dollars from investors who had no problem paying his enormous fees (which are far higher than other hedge funds).

In 1999, as a reporter at the Wall Street Journal, I co-authored one of the first stories detailing Cohen’s trading methods. I was alerted to Cohen by then-Bear Stearns chief executive James Cayne, who described SAC as “everyone’s first call.” Cayne wasn’t hinting at insider trading but rather that Cohen had quietly built an information gathering machine with which Wall Street firms, hungry to do business with the fund and thereby reap hefty trading commissions, would share their best research.

It’s difficult to know exactly when “everyone’s first call” translates into inside information, but not long after that article, SAC began appearing on regulator watch lists for trading on what’s known as “material, non-public information,” a.k.a. insider trading.

Cohen and his people contend that they gain their edge through great research and contacts; indeed some of the examples of what looked like clear-cut insider trading that I came across looked less clear-cut when I delved deeper.

The Feds respond that there are just too many coincidences to ignore — instances when SAC made massive and profitable trades just before major corporate events like mergers or earnings announcement were announced to the public.

So over the course of the past decade, they’ve set up at least one sting operation to entrap Cohen into conceding that his trades are dirty by attempting to plant a cooperator inside SAC; it failed because Cohen wouldn’t make the hire. On another occasion, the Justice Department got a court order (and met the necessary “probable cause” standard) to wiretap Cohen’s home telephone. It also turned up empty, or as one former Justice Department office told me “we really didn’t get s–t.”

So why didn’t the Feds just go away? First, there were all those “coincidences.” Then there’s the fact that as many as nine former or current SAC employees have been implicated in the government’s current insider trading probe, either as a cooperator or a defendant. As the government sees it, in other words, something is definitely rotten in Stamford.

Cohen and his people maintain that the firm has a rigorous compliance controls, but the Feds basically believe it’s a system designed to protect the man at the center, Cohen himself. Traders talk in a kind of code in order to avoid exposing the SAC chief to any possible wrongdoing by those below him.

Most of all, the regulators think Cohen (who has amassed a fortune of around $9 billion since launching SAC) himself may have indulged in some of the improper trading — though they don’t have the smoking gun, like a wiretap or a cooperating witness.

Civil libertarians (like myself) worry about government over-reach. How much should the government pursue someone they believe is guilty of a crime when they can’t really prove he or she committed it? But talk to people inside government and they will tell you that too much bad stuff has gone down inside SAC for Cohen to get off easily. The “failure to supervise” charge just happens to be the easiest way to put SAC out of business.